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Aehr Test Systems (NASDAQ:AEHR)

F3Q09 Earnings Call

April 2, 2009; 5:00 pm ET

Executives

Rhea Posedel - Chairman & Chief Executive Officer

Gary Larson - Vice President of Finance & Chief Financial Officer

Tony Rossi - Financial Relations Board

Analysts

Jeffery Scott - Scott Asset Management

Joey Mcurgie - State of Wisconsin Investment

Operator

Good afternoon ladies and gentlemen thank you for standing by. Welcome to the Aehr Test Systems third quarter fiscal 2009 conference call. During today’s presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions) This conference call is being recorded today Thursday, April 2 of 2009.

I would like to turn the conference over to Tony Rossi with Financial Relations Board. Please go ahead sir.

Tony Rossi

Thank you, operator. Good afternoon and thanks for joining us to discuss Aehr Test Systems results for the third quarter of fiscal 2009. By now you should have all received a copy of today’s press release, if not you can call my office at 213-486-6540 and we’ll get one to you right away.

With us today from Aehr Test are Rhea Posedel, Chairman and Chief Executive Officer; and Gary Larson, Vice President of Finance and Chief Financial Officer. Management will review its operating performance for the quarter before opening up the call to your questions.

I’d now turn the call over to Gary Larson. Go ahead Gary.

Gary Larson

Thank you Tony and thanks to everyone for joining us today. Before we begin I’d like to make a few comments about forward-looking statements. Please be advised that during the course of our discussion today we may make forward-looking statements that involve risks and uncertainties relating to projections regarding industry growth and customer demand for Aehr Test products, as well as projections regarding Aehr Test future financial performance. Actual results may differ materially from projected results and should not be considered as an indication of future performance.

These risks and uncertainties include, without limitation world economic conditions, the timing of the recovery of the semiconductor equipment markets, the company’s ability to maintain sufficient cash to support operations, acceptance by customers of Aehr Test technologies, acceptance by customers of the system shift upon receipt of a purchase order, the ability of new products to meet customer needs or performance described, the company’s development and manufacture of a commercially successful wafer level test and burn-in systems and the potential emergence of alternative technologies, each of which could adversely affect demand for Aehr Test’s products in calendar year 2009.

We refer you to our most recent 10-K and 10-Q reports and other reports from time-to-time filed with the U.S. Securities & Exchange Commission for a more detailed description of the risks facing our business and factors that could cause actual results to differ materially from projected results. The company disclaims any obligation to update information contained in any forward-looking statements to reflect events or circumstances occurring after the date of this conference call.

Now, I’d like to introduce our Chairman and CEO, Rhea Posedel.

Rhea Posedel

Thank you, Gary. Good afternoon and welcome to our conference call for the third quarter of fiscal 2009. During the quarter the worldwide economic meltdown caused our largest customer Spansion to file for bankruptcy. This had a serious impact in our operating results and balance sheet for our third fiscal quarter. As a result, we wrote off AR inventory and backlog related to Spansion, which consisted of FOX-1 testers and WaferPaks.

This had a significant negative impact to our expected revenue and bottom line for the third quarter. Aehr Test has been in business for over 31 years and this is the first time that we ever had one of our semiconductor customers go bankrupt. We believe we have taken a conservative position regarding the Spansion write-offs. Spansion has been the market share leader in north flash, so we hope that they will either survive as a standalone company or will be acquired.

If either of these scenarios happened, we could receive additional orders for FOX-1 testers and WaferPak contactors. Another potential upside is the payment of some of the accounts receivable out of the bankruptcy proceedings. With no shipments to Spansion for the quarter and other customers in a wait and see mode, our revenue was only $1.2 million for the quarter. While the experience with Spansion has been extremely disappointing, we have had some positive progress in other key areas.

We are pleased to say that we shipped our ABTS L-36 logic burn-in and test system to IFT. This was our first ABTS shipment and we would acceptance to be in about three to six months. We also shipped follow on WaferPaks to our FOX-15 customer, a leading automotive IC provider. These WaferPak should be accepted in our fourth quarter. We believe that we have taken the appropriate actions that will enable Aehr Test to survive this negative hit from Spansion.

Last month we announced a reduction in headcount and other expenses, and we intend to take additional actions as necessary to maintain sufficient cash to manage through this economic downturn. Aside from reducing expenses our strategy during this downturn is to aggressively sell our new and existing products to expand our customer base in our markets. Our objective is to come out of this downturn a stronger company when the industry recovers.

We feel good about our opportunity to achieve this goal as we have the strongest competitive product portfolio in our history with the FOX-1, FOX-15 and now the ABTS family of products. Even though IC manufacturers are adding capacity, we expect they will purchase systems that can lower operating cost and/or provide new technology needed to meet their future testing and burn-in requirements such as Known-Good Die or KGD.

The demand for KGD is driven by the industry’s migration to multi-DiePak packages, which will happen even in a downturn. We believe our FOX wafer level of burn-in systems can provide a cost effective solution for producing KGD.

We are encouraged last quarter by the recording activity for ABTS family of products for a wide variety of applications from logic to memories. We expect to soon announce our third ABTS system order probably the next month or so, as we are in the final discussions with a leading military aerospace company. This should be a new ABTS system configuration with 320 channels for burn-in boards providing the flexibility and test of wide variety of logic and ASIC devices.

One of the many market segments we are targeting with the ABTS is the military and aerospace system providers. It’s one of the few market segments that is still purchasing capital equipment during this downturn. We also expect to announce additional ABTS customers in the next three to six months.

Customers are interested in the ABTS product because this platform offers lower cost of ownership and advanced thermal and electronic technology to parallel test and burn-in a wide range of logic and memory devices. We believe there is an opportunity to sell new technology products even in down markets.

We are also working aggressively to sell our FOX-1 tester and FOX-15 wafer level burn-in test system and there continues to be interest in these products. The problem is that the company’s we are targeting, memory and automotive IC manufacturers are in the hardest hit markets and as a result are delaying capital purchases.

We are also making good inroads and would hope to penetrate new accounts when the industry turns around. When the turnaround does occur we believe we will see our orders and shipments increase. Our strategy during the downturn is to maximize cash and penetrate as many production accounts as possible with our ABTS and FOX products. This will allow us to be well positioned to take advantage of future opportunities and grow market share.

At this time I expect that the next few quarters will be very difficult for Aehr Test, our customers are telling us they don’t see their capacity increasing until late calendar 2009 at the earliest. With all the uncertainty in the economy and with our customer base, we are unable to provide guidance at this time.

These are difficult times for the equipment industry, but there could be some upside if Spansion survives and reassumes buying for us and if the industry starts turning back in late calendar 2009 or early 2010.

With that said, we believe Aehr Test is in a favorable position to grow market share during this downturn, enabling us to return to a growth trajectory when your industry recovers.

We have exciting new technology with our FOX-1 full wafer test and burn-in systems, WaferPak contactors and we feel confident that we can continue to win new accounts with our new ABTS products which address new market segments for parallel test and burn-in of package integrated circuits.

Now I’d like to turn over the call over to Gary and he’ll discuss the third quarter financials. Gary.

Gary Larson

Thanks Rhea. Net sales were $1.2 million in the third quarter of fiscal 2009 compared with $10.8 million in the third quarter of fiscal 2008. A decrease in net sales for the third quarter of fiscal 2009 resulted primarily from a decrease in net sales of the company’s wafer level products. We additionally had $1 million worth of shipments which required customer acceptance. That revenue is expected to be recognized in the next several months.

Gross loss was at $6.8 million for the third quarter of fiscal 2009, compared with gross profit of $5.5 million in the year ago period. The difference was primarily the result of the significant decline in net sales and the $5.7 million provision for excess and obsolete inventory reserves. Majority of the reserves were taken as a result of Spansion’s bankruptcy.

SG&A was $15.3 million in the third quarter of fiscal 2009, compared with $2 million in the prior year period. The significant increase in SG&A expense was primarily due to the $13.7 million increase and our provision for bad debts.

Third quarter 2009 R&D was 1.6 million, slightly lower than the $1.8 million in the third quarter of last year. R&D spending varies from quarter-to-quarter depending on the level of development of new products. The decrease was primarily attributable to a decrease in employment related expenses of $116,000 and project material related costs of $38,000.

Income tax expense of $3.7 million in the third quarter of fiscal 2009 included $4.9 million of tax expense related to the allowance for deferred tax assets, partially offset of by benefits during the quarter of $1 million, reflecting the reversal of expenses recorded earlier in fiscal 2009.

The net loss for the third quarter was $27.7 million or $3.28 per diluted share, compared with net income of $1.9 million or $0.23 per diluted share a year ago. The pro forma net loss in the third quarter of fiscal 2009 was $1.8 million or $0.21 per diluted share, compared to pro forma net income of $2.1 million or $0.25 per diluted share in the same period of the prior year.

In determining the pro forma or non-GAAP net loss, the following items were excluded. $13.7 million, provision for bad debt; $5.7 million, provision for excess and obsolete inventory; $4.9 million, an increase in the valuation allowance against the company’s deferred net assets; $0.5 million charge related to cancellation cost; $0.3 million, goodwill impairment charge; $0.3 million, stock compensation expense and $0.2 million in severance.

Our cash, cash equivalence and short-term investment stood at $7.4 million at February 28, 2009. This is a decrease of $6.3 million from the end of last quarter. Our inventory was $5.9 million at February 28, 2009, a $4.6 million decrease from the end of prior quarter, resulting primarily from the provision for excess and obsolete materials. Shareholders equity decreased to $13.5 million or $1.60 per share outstanding at February 28, 2009 and we continue to have no outstanding debt.

We’re now ready to answer your questions. Operator, please go ahead.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jeffrey Scott - Scott Asset Management.

Jeffery Scott - Scott Asset Management

What is the R&D and SG&A going to be on a go-forward basis? The R&D was 1.6 for this quarter; what is it likely to be on an annualized basis going forward?

Rhea Posedel

We’re trying not to provide guidance on any of these things unfortunately, but as we did discuss, there have been some expense reductions that have already been taken and we will take additional ones as necessary. So, most likely we would see R&D decline.

Jeffery Scott - Scott Asset Management

Okay, you took 100% provision against the Spansion receivables?

Gary Larson

That’s correct. We did.

Jeffery Scott - Scott Asset Management

What is the price of Spansion unsecured debt on the open market right now?

Gary Larson

You mean the trading value?

Jeffery Scott - Scott Asset Management

Right.

Gary Larson

I don’t know what the current price is, but prior to the bankruptcy filing it had gone to an extremely low value where it was returning something along the lines of 400% a year annual interest.

Jeffery Scott - Scott Asset Management

Have you seen a price post bankruptcy?

Gary Larson

I’ve not.

Rhea Posedel

We’ll check it.

Jeffery Scott - Scott Asset Management

That would give you a pretty good target as to what kind of provision would be necessary. The inventory that you wrote-off; let me approach the question in a different way; has Spansion come to you since the bankruptcy filing and ordered any product?

Rhea Posedel

Well, they haven’t, but they have asked us to quote a couple of WaferPaks, support software, things of that sort. Right now they don’t have a lot of cash. Obviously they are trying to get by with a minimum amount of capital expenditures and consumer expenditures and it will be mostly driven by the market. If the demand is higher going forward, they’ll probably buy more FOX-1 and WaferPaks; if the demand is lower it will be pushed out. The first quarter was a slow period for them.

Jeffery Scott - Scott Asset Management

Do they have a debt financing in place?

Gary Larson

Again we don’t want to be the people disclosing the whole Spansion bankruptcy situation, but for that in particular, yes, I believe they do have debt financing.

Jeffery Scott - Scott Asset Management

So, if in fact they did come to you for product, the inventory that you have currently written off would have value? Is that a correct statement?

Gary Larson

Yes, it is.

Rhea Posedel

We would be shipping systems with no cost. It would certainly be cash on delivery or something of those kinds of terms.

Jeffery Scott - Scott Asset Management

I think other suppliers of Spansion have already publicly said that they are shipping COD, right?

Rhea Posedel

Correct.

Jeffery Scott - Scott Asset Management

The cancellation cost of $500,000, was that related to Spansion as well?

Gary Larson

Yes, it was related to Spansion and it was related to vendors that had work in progress, which had not been shipped to us yet.

Jeffery Scott - Scott Asset Management

Okay, so you were paying your suppliers?

Gary Larson

Exactly.

Jeffery Scott - Scott Asset Management

Okay. The defense aerospace potential customer you were talking about, is that a customer that you have been talking to for a fairly long period of time?

Rhea Posedel

We have sold an old legacy maybe 20 years ago. So, this is a new requirement that came up in the last six months or so. So, we are able to turn this order around fairly quickly, and I think the ABTS was an ideal product for them and allowed us to penetrate that account without too much in the way of competition; because it had a high number of IOs so they could test some of their complex logic devices.

Jeffery Scott - Scott Asset Management

Okay. Where do you stand in the sales pipeline for other FOX-1 and FOX-15s?

Rhea Posedel

As I mentioned in the conference call, we were going after the memory applications, but the memory people, whether it’s DRAM or flash, really aren’t adding much in the way of capacity. We’ve talked to the Monex and people like that aren’t really spending money at this point.

So, I would say our most likely chance would be a FOX-15, from a repeat order from our automotive IC provider, because they bought additional WaferPaks last quarter and their demand is starting to pickup, which is good news for us.

So it’s possible in the next three to six months or a quarter or two we could get a follow on FOX-15 order for them and hopefully if the automotive industry turns around we can maybe generate some interest and we’re talking to other automotive companies and maybe generate some evaluation orders from them as well.

Jeffery Scott - Scott Asset Management

But you are not even to be evaluate stage with orders right now?

Rhea Posedel

No, but it’s certainly easier when we have a customer that has a up and working system to prove that it works.

Operator

(Operator Instructions) Your next question comes from Joey Mcurgie - State of Wisconsin Investment.

Joey Mcurgie - State of Wisconsin Investment

So, where do you think you’d be taking your breakeven level down to?

Gary Larson

Again, we’re not going to be providing specific guidance. I can tell you that the level that we just reported, we are significantly under our break-even level and we will be evaluating any additional cost reductions or steps as necessary to minimize our loss of cash during the downturn.

Joey Mcurgie - State of Wisconsin Investment

So, I guess you are still going after Spansion; it sounds like it in terms of going to sell systems to them.

Rhea Posedel

No, that’s correct. Spansion still looks at us as a key vendor for them and supplier and they will do whatever possible to help us out, but as I said, if their business continues to increase then there’s opportunities for additional systems and it also depends somewhat on what happens to them.

I mean, if there’s a couple of scenarios they are pursuing; one is, to be purchased out right and these are public announcements they have made. The other one is to restructure as a smaller company. So each of those has a different outcome I guess in terms of business. If it’s a smaller company restructuring, maybe they have enough equipment to last in the year; and if they get purchased by a large company, then maybe there’s investment money and they can continue to grow their share.

So, I think a lot depends on how and what happens to Spansion long term, but we still see them as a strategic customer and hopefully they’re going to continue to buy systems and services from us.

Joey Mcurgie - State of Wisconsin Investment

The products that they are selling to the defense and aero customer, what kind of ASP’s does that product have?

Gary Larson

No, we’re selling them an engineering version of the large ABTS. So, it’s kind of like a MAX, maybe around 300,000, but it’s a smaller capacity system.

Operator

Thank you. Management there are no further questions. I’ll turn it back over to you for closing comments.

Rhea Posedel

Well, this is Rhea. I’d like to thank you for joining us this afternoon and certainly I’m glad to have Q3 behind us and we look forward to our next quarter’s conference call. Thank you very much.

Gary Larson

Thank you.

Operator

Thank you. Ladies and gentlemen that will conclude today’s teleconference. We do thank you then for your participation and at this time you may disconnect. Have a nice day.

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